Arizona Real Estate License Practice Exam 2025 - Free Real Estate Practice Questions and Study Guide

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What is the maximum LTV typically allowed for conventional loans without PMI?

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80%

The maximum loan-to-value (LTV) ratio typically allowed for conventional loans without private mortgage insurance (PMI) is 80%. This means that a borrower can finance up to 80% of the property's value without being required to pay for PMI, which is insurance that protects lenders in case the borrower defaults on the loan.

The rationale behind this limit is that lenders want to mitigate their risk. An LTV of 80% indicates that the borrower has at least 20% equity in the property, which provides a cushion for the lender in the event of a default. This equity can help offset any losses they may incur when selling a foreclosed property.

When LTV ratios exceed 80%, lenders typically require PMI to protect themselves financially from the increased risk associated with higher leverage. Thus, for conventional loans, keeping the LTV at 80% or lower is essential for borrowers aiming to avoid additional costs associated with PMI.

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